Many Advisors Face March 30 Deadline

With Securities and Exchange Commission registration requirements set to change March 30, will financial advisors, including private fund managers and registered investment advisors, know what to do if they must shift from federal to state oversight?

At the same time, will both the SEC and state registration offices have the bodies and budgets to field these new registration requests?

The new rules require RIAs with under $100 million in assets under management (AUM) to switch to state oversight and more private fund managers to register. In the case of investment advisors with AUMs of between $25 million and $100 million, the Dodd-Frank Act requires they switch from federal to state registration by mid-2012.

Previously, private fund managers didn't have to register with the SEC if they limited the number of funds they advised to fewer than 15. This year they will need to register with the SEC if they have at least $150 million in AUM or with the state if their AUM is less than that threshold. The SEC also created a new classification of "exempt reporting advisors" for private fund advisors under $150 in AUM and venture capital advisors. The new requirements are part of the Dodd-Frank Act of 2010.

"The SEC wants more transparency related to the private fund managers," says Janaya Moscony, president and CEO of SEC3, a Philadelphia-based financial consulting firm, "so, there is going to be more information required from these types of managers than there has been in past."

Private fund managers who are exempt from SEC registration must still complete Form ADV Part 1. The SEC says it may also introduce recordkeeping rules specific to exempt reporting advisors at a future date. Those classified as exempt-reporting advisors must look up the registration laws of the state where they do business. And if required to register, they must submit an entire Form ADV form. Individual states are adopting their own private advisor exemption.

Given the myriad SEC registration changes, industry experts say it's unlikely that the majority of financial advisors will be well versed on all the new requirements when the deadline arrives. However, SEC officials think advisors are prepared for the change.

Zachary Gronich, founder of RIA in a Box, a New York City-based consulting firm that provides compliance advice for setting up as an RIA, says most advisors affected by the changes aren't ready.

"It's going to be huge business, fortunately for us, and unfortunately for the advisors," says Gronich. "Come March 15 and16, many firms are going to scramble at the last minute. Then they're going to get that first request letter from the state and they're going to realize that they literally have no idea what to do next.''

Moscony says many advisors will now also need to ask what they're required to do on the state level. "And every state is going to be different; it's very confusing."

Moscony says some advisors will assume that after completing the registration paperwork they're done. "But it's really just the starting line," she said. "They'll need to do ongoing testing and everything else needed to stay up on the regulations as they change."

"It's nobody's fault," Gronich said. "But the differences between registering and staying registered at the SEC and registering and staying registered at the state level are so outrageous that a lot of SEC (registered) firms are really going to be taken aback by the new regulations and the amount of paperwork that they are going to have to do now."

For example, he said, firms that filed at the SEC did not have to submit a company balance sheet or income statement at registration. "They're very relaxed on what goes into you ADV at the SEC. There are very few deficiencies on a registration at the SEC, almost as if they are only looking at four or five key things," he said.

"When a lot of these [financial advisors] start going back to the state registration, especially the states that really pour over the ADV like Utah, Michigan and Pennsylvania, they're going to start getting 20- to 30-page deficiency letters and be terrified, because they honestly won't have a clue to what it means, what to do with it, or who to turn it in to," Gronich said.

Robert Plaze, SEC deputy director of the Division of Investment Management, says the volume of telephone calls asking about registration has been "steady" since mid-January.

"We've had a large number of calls, but we've have people handling them and we're able to get back to them pretty quickly," Plaze said. "Right now we're answering the 30, 40 or 50 questions that we get a day from people who haven't used the online electronic system or people who haven't completed the form yet."

Plaze says answers to frequently asked registration questions are also posted on the SEC Web site. He dismissed the idea of a potential last-minute deluge of panicky advisors calling with registration questions.

"Remember, they (registering advisors) have had a year and eight months to understand and know this," Plaze said. "I think people are on notice here, and then once registered you have obligations under the statute to develop a compliance program."
-Jim McConville